ACF GROUP ASSIGNMENT II

INFOSYS VALUATION USING EVA MODEL

GROUP MEMBERS: Kuldeep Bansal Paavni Sethi Ankur Gupta Shivangi Sood Aroosh Mahipal Prince Sahni Surya Grover

IT SECTOR OVERVIEW

Information technology (IT) is the use of computers and telecommunications equipment to store, retrieve, transmit and manipulate data. The term is commonly used as a synonym for computers and computer networks, but it also encompasses other information distribution technologies such as television and telephones. Several industries are associated with information technology, such as computer hardware, software, electronics, semiconductors, internet, telecom equipment and computer services. The Information technology industry in India has gained a brand identity as a knowledge economy due to its IT and ITES sector. The ITITES industry has two major components: IT Services and business process outsourcing (BPO). The growth in the service sector in India has been led by the ITITES sector, contributing substantially to increase in GDP, employment, and exports. The sector has increased its contribution to India's GDP from 1.2% in FY1998 to 7.5% in FY2012. According to NASSCOM, the ITBPO sector in India aggregated revenues of US$100 billion in FY2012, where export and domestic revenue stood at US$69.1 billion and US$31.7 billion respectively, growing by over 9%. The major cities that account for about nearly 90% of this sectors exports are Bangalore, Chennai, Delhi, Mumbai, Hyderabad, Coimbatore, Pune and Kolkata. Export dominate the ITITES industry, and constitute about 77% of the total industry revenue. Though the ITITES sector is export driven, the domestic market is also significant with a robust revenue growth. The industrys share of total Indian exports (merchandise plus services) increased from less than 4% in FY1998 to about 25% in FY2012. According to Gartner, the "Top Five Indian IT Services Providers" are Tata Consultancy Services, Infosys, Cognizant, Wipro and HCL Technologies. This sector has also led to massive employment generation. The industry continues to be a net employment generator - expected to add 230,000 jobs in FY2012, thus providing direct employment to about 2.8 million, and indirectly employing 8.9 million people. Generally dominant player in the global outsourcing sector. However, the sector continues to face challenges of competitiveness in the globalized world, particularly from countries like China and Philippines. India's growing stature in the Information Age enabled it to form close ties with both the United States of America and the European Union. However, the recent global financial crises has deeply impacted the Indian IT companies as well as global companies. As a result hiring has dropped sharply, and employees are looking at different sectors like the financial service, telecommunications, and manufacturing industries, which have been growing phenomenally over the last few years. India's IT Services industry was born in Mumbai in 1967 with the establishment of Tata Group in partnership with Burroughs.The first software export zone SEEPZ was set up here way back in 1973, the old avatar of the modern day IT park. More than 80 percent of the country's software exports happened out of SEEPZ, Mumbai in 80s.

RECENT DEVELOPMENTS

The economic effect of the technologically inclined services sector in Indiaaccounting for 40% of the country's GDP and 30% of export earnings as of 2006, while employing only 25% of its workforce. Today, Bangalore is known as the Silicon Valley of India and contributes 33% of Indian IT Exports. India's second and third largest software companies are head-quartered in Bangalore, as are many of the global SEI-CMM Level 5 Companies. Mumbai too has its share of IT companies that are India's first and largest, like TCS and well established like Reliance[disambiguation needed], Patni, LnT Infotech, i-Flex, WNS, Shine, Naukri, Jobspert etc. are head-quartered in Mumbai. And these IT and dot com companies are ruling the roost of Mumbai's relatively high octane industry of Information Technology. Such is the growth in investment and outsourcing, it was revealed that Cap Gemini will soon have more staff in India than it does in its home market of France with 21,000 personnel+ in India.

INFOSYS

Infosys Limited (formerly Infosys Technologies Limited) is an Indian multinational provider of business consulting, technology, engineering, and outsourcing services. It is headquartered in Bangalore, Karnataka. Infosys is the third-largest India-based IT services company by 2012 revenues. Infosys has a global footprint with 67 offices and 69 development centers in US, India, China, Australia, Japan, Middle East, UK, Germany, France, Switzerland, Netherlands, Poland, Canada and many other countries. Infosys and its subsidiaries have 155,629 employees as on Dec 31, 2012. The Company

provides business consulting, technology, engineering and outsourcing services to help clients build tomorrow's enterprise. In addition, the Company offers software products for the banking industry. Infosys was co-founded in 1981 by N R Narayana Murthy, Nandan Nilekani, N. S. Raghavan, S. Gopalakrishnan, S. D. Shibulal, K. Dinesh and Ashok Arora after they resigned from Patni Computer Systems. The company was incorporated as "Infosys Consultants Pvt Ltd." in Model Colony, Pune as the registered office and signed up its first client, Data Basics Corporation, in New York. In 1983, Infosys corporate headquarters was relocated to Bangalore.

CURRENT SHAREHOLDING

Life Insurance Corporation of India has 6.28%. Oppenheimer Developing Markets Fund, Abu Dhabi Investment Authority, a sovereign wealth fund owned by Abu Dhabi, and the Government of Singapore also hold significant shareholdings as on June 30, 2012. The remaining public shares are owned by financial institutions and individual investors. Acquisitions In December 2003, Infosys had acquired Australia-based IT service provider Expert Information Services for $23 million. In September 2012, Infosys acquired Switzerland-based Lodestone Management Consultants for about $345 million.

Company Valuation

Economic Value Added or EVA is an estimate of a firm's economic profit being the value created in excess of the required return of the company's investors (being shareholders and debt holders). Quite simply, EVA is the profit earned by the firm less the cost of financing the firm's capital. The idea is that value is created when the return on the firm's economic capital employed is greater than the cost of that capital. This amount can be determined by making adjustments to GAAP accounting. There are potentially over 160 adjustments that could be made but in practice only five or seven key ones are made, depending on the company and the industry it competes in.

For company valuation of Infosys we have choose ECONOMIC VALUE ADDED method as: Information required for valuation is easily available Since Infosys do not have any debt it makes easier to calculate EVA.

Note: As of March 31 2012, the company has only one class of equity shares and has no debt. Consequently to the above capital structure there are no externally imposed capital requirements. Therefore we do not consider any amount of debt in calculation.

Economic Value Added (EVA) statement

fig in crore

2012 Cost of capital Return on risk free investment (%) Market Premium (%) Beta Average debt Cost of debt Average weighted capital Cost of equity (%) WACC (%) Economic Value Added (EVA) Operating profits Less: Tax WACC capital employed EVA 7.99 5.00 0.71 NA 30382 11.54 11.54 9779 3367 3506 2906

2011 7.66 5.00 0.71 NA 25688 11.21 11.21 8102 2490 2880 2732

2010 7.20 5.00 0.68 NA 21634 10.60 10.60 6910 1681 2293 2936

2009 7.00 7.00 0.74 NA 17431 12.18 12.18 6421 919 2123 3379

2008 8.00 7.00 0.76 NA 12527 13.32 13.32 4640 685 1669 2286

ECONOMIC VALUE ADDED

4000 3500 3000 2500 2000 1500 1000 500 0 2008 2009 2010 2011 2012 ECONOMIC VALUE ADDED

EVA / Average Capital Employyed

25.00%

20.00%

15.00% EVA / Average Capital Employyed

10.00%

5.00%

0.00% 2008 2009 2010 2011 2012

Through data analysis we can conclude that company EVA is although increasing but company EVA over capital employed is decreasing.

THANK YOU